Abu Dhabi’s $35bn throws Egypt a liquidity lifeline

February 27, 2024

A market worker in Cairo stands under a pro-President Sisi banner. The ADQ deal has raised hopes that Egypt's economy can rebuild

ADQ invests in resort
‘A lot of optimism’ about deal
IMF negotiations continue

A $35 billion investment by Abu Dhabi sovereign wealth fund ADQ to develop a resort on Egypt’s north coast could cover the country’s liquidity needs for the next three to four years, analysts have said.

Mostafa Madbouly, the Egyptian prime minister, said on Saturday he had signed an agreement with ADQ to develop a site at Ras el Hekma between Marsa Matruh and Alexandria.

Madbouly said he expected Abu Dhabi to make upfront payments in two tranches, Bloomberg reported. That will include $15 billion within a week, of which a third will come from the UAE’s deposits, and another $20 billion in two months.

The second tranche will consist of $14 billion in fresh financing and $6 billion from the UAE’s remaining deposits, according to Bloomberg.

The news is a vote of confidence in Egypt, which has been struggling with a chronic shortage of foreign exchange, intermittent power cuts and high inflation.

Cairo has been negotiating with the International Monetary Fund over a requirement that the Egyptian pound be allowed to float freely. The US dollar tightened by 17 percent on the parallel market to trade at EGP50 following Saturday’s announcement.

Madbouly said Egypt could eventually attract as much as $150 billion, the biggest investment in the country’s history.

“There’s a lot of optimism about what this deal will do in terms of alleviating the shortage of foreign currency,” said James Swanston of Capital Economics.

This was accompanied by a 5 percent drop in the EGX30 – the benchmark index of the Egyptian Stock Exchange – after speculation that the injection of hard currency increased the likelihood, but decreased the potential size, of an imminent devaluation of the Egyptian pound.

In particular, shares in CIB, a leading bank in which Abu Dhabi has a stake, fell by 10 percent. CIB shares have become a popular hedge against the pound as traders have bought the right to convert to shares to sell on the London Stock Exchange for hard currency.

Economist Ali Metwally was among those who believed that the deal makes a devaluation more likely, saying he now expects the pound to fall by 20 to 25 percent against the dollar.

Metwally said the initial cash injection should tide over Egypt’s external debt obligations for the next three to four years. Investment bank Goldman Sachs had previously put Egypt’s financing gap for that period at $25 billion.

The analysts also suggested the deal would pave the way to securing an increased IMF extended fund facility. In an unrelated press conference last week, an IMF spokesperson said talks between Egypt and the fund had made “excellent progress” on negotiations to release “a very comprehensive support package”.

Jihad Azour, the IMF’s director of the Middle East and Central Asia department, told Al Arabiya Business on Sunday that although “there is no doubt” the Ras al Hekma announcement was “beneficial to Egypt’s economy”, it was “not related to the IMF negotiations with Egypt”.

The OECD, which has just published its first economic survey of Egypt, expects growth to ease to 3 percent in the Egyptian financial year 2023/24. It then forecasts a rebound to over 5 percent in 2025/26.

It also predicts that public debt will fall as a percentage of GDP to 92 percent in this financial year, and decline to 87 percent and 81 percent over the following two years.

OECD secretary general Mathias Cormann stressed the need for Egypt to boost the private sector, tighten monetary policy and scale back expensive construction projects “if and when necessary”.

Speaking on Friday, Cormann said growth in Egypt had “held up remarkably well through the Covid-19 pandemic and subsequent shocks of higher food and energy prices”. He also warned about inflation, which is currently at 30 percent.